Daily Newsletter, Wednesday, 10/10/2018

Table of Contents

Market Wrap

Fear Rises, Market Slides

by Thomas Hughes

The broad market fell sharply as fear of rising inflation, FOMC interest rates and earnings angst permeate the market. If the chart of the US ten yield treasury yield is any indication it looks like the sell-off in equities will continue because it looks like rates are going to continue rising. The caveat is that rates are rising because the economy is in good shape and that is not a great reason to sell stocks. Earnings growth is still on tap and earnings growth is still in the forecast, so I expect to see this sell-off turn into a buying opportunity as the earnings cycle unfolds.

Asian markets were mostly flat with indices posting gains in the range of 0.15%. Indices in the region were supported by Japanese core machinery orders which beat expectation and raised hopes investment spending was on the rise. The Nikkei advanced 0.16% on the news but was led by the Shang Hai Index's 0.18%. European markets moved lower, the DAX and CAC shedding more than -2.0%, as selling in the US intensified. The FTSE lagged with a loss close to -1.30%.

Market Statistics

Futures trading was negative most of the morning although there was some volatility in the early hours. The S&P 500 and Dow Jones Industrial Average were indicated to open with losses of -0.30% going into the opening bell which put the broad market index below the 2,875 support target. Selling intensified throughout the morning and had the indices down nearly -2.0% by 2:30 PM. Late afternoon saw sellers renew their efforts and push the broad market down more than -3.25% and others, like the NASDAQ and Transportation Average, down more than -4.0%.

Economic Calendar

The Economy

Today's economic data was good with one caveat; it supports the idea of improving US economics and rising interest rates which ultimately helped push the indices lower. The Producer Price Index rose 0.2%, as expected, in a rebound from last month's -0.1% decline, and 2.6% over the same time last year. The news renewed upward pressure in inflation at the producer level but not, I think, so much as to force the FOMC's into aggressively rate hikes. While strong the 2.6% YOY read is down for the second month and evidence rising rates are helping to contain inflation. Most of the increase in headline PPI was due to a 0.3% rise in price for services, offset by a -0.1% decline in prices for goods. At the core level, ex-food and energy, PPI rose 2.9% YOY.

The final read on August Wholesale Inventories was revised up by 0.4% to 1.0%. This is the largest increase in wholesale level inventories since 2013 and will help boost 3rd quarter GDP expectations. The Atlanta Fed's GDPNow tool ticked higher with the data and showed 3rd quarter GDP growth tracking near 4.2%.

The Dollar Index

The Dollar Index fell in today's session, shedding about -0.20% at the close, to test support at the $95.50 level. Today's candle is small and red with visible shadows showing some indecision toward today's prices. The indicators are mixed but consistent with consolidation following last week's move above resistance so long as prices do not fall below support. A move below support may not be bearish but would likely result in a test of the short-term moving average, a move below that would be bearish. A bounce from support at this level would be bullish and trend-following and may result in a move up to the $97 level. Thursday's CPI data could be the trigger for such a move; if consumer-level inflation comes in hotter than expected, it will reinvigorate FOMC interest rate outlook.

The Gold Index

Gold prices edged up about 0.20% on today's dollar weakness. The move is bullish but does not look strong. The metal is moving up from support targets, but the indicators remain bearish so further downside, at least a retest of the $1,180 level, looks likely. If gold prices continue to move higher resistance is at and near the $1,205 level and the short-term moving average.

The Gold Miners ETF GDX rose in today's session, adding more than 1.10%, but failed to move above resistance. The ETF continues to wind up around the $18.75 level and looks like it will persist in this action in the near-term. The indicators are mixed and weak, consistent with range-bound trading, but with a bearish bias. Both indicators are consistent with resistance levels and rolling into a bearish trend-following signal that could take the ETF down to retest support near $17.50. A move up would have to surpass resistance at the short-term moving average before moving up to retest the recent highs near $19.25.

The Oil Index

Oil prices fell nearly -3.0% on worries of slowing global growth, demand fear, and uncertainty over the true impact of Iran sanctions. The price of WTI shed almost $2.00 to create a long red candle with shaven bottom indicative of strong, steady selling right into the close of the session. The candle breaks support at the $74 and set a new two week low but may not go too far. Support targets exist just below today's close, and there is the data to consider. US crude oil data will be released tomorrow because of Monday's bank holiday. If WTI falls below the short term moving average, near $72, a return to $68 is possible.

The Oil Index fell sharply and confirmed resistance at the 1,600 level. The candle is long and red, engulfs two week's worth of candles, broke below the short-term moving average and is indicated lower. While bearish, the move is sparked by fear and profit taking and is not consistent with the fundamental outlook. Yes, global growth was downgraded by 0.2% for 2019 but the 3.7% expected is still quite strong, and earnings outlook is still robust. The energy sector is expected to post 27% earnings growth next year and today's fall in prices does little to hurt that outlook. The XOI may fall to the long-term moving average, and if it does, I will expect to see it bounce as it has several times this year already. A move up in tomorrow's session without a move up in the underlying commodity would be trend-following but could be a dead-cat bounce.

In The News, Story Stocks and Earnings

The yield on the ten year US treasury jumped another 1.0% in today's session to tickle its seven-year high. So far, resistance is holding at this level, but the price action looks bullish. The yield is holding near the high and forming a tight consolidation range that could easily result in a move up. A move up would confirm a bullish flag pattern and likely lead yield up to 3.500 in the near-term. Tomorrow's CPI could be the trigger if it comes in hot.

The financial sector is expected to begin reporting earnings later this week with releases from JP Morgan, Wells Fargo, and Citigroup. The sector is expected to produce robust earnings growth this quarter, next quarter and next year but that was not enough to keep it from moving lower in today's session. The Financial Sector SPDR XLF shed about -3.0% in a move that confirmed resistance at the short-term moving average and broke below support at the long-term moving average. The move is bearish and could take the ETF down to the bottom of the long-term trading range near $26.50, but the indicators don't agree. The indicators are a mixed, consistent with range-bound trading, but also showing signs of support within the market that may result in a snap-back in prices later this week.

The VIX jumped more than 43% in Wednesday trading and has set a new six month high. The fear index is on the rise after confirming support at the $15 level and indicated higher. The indicators are both pointing up and trending higher, consistent with rising prices, and suggest a move to $25 is likely.

The Indices

The indices fell, and fell, and fell in today's action and produced their biggest one-day losses in many moons. The biggest loss was posted by the NASDAQ Composite which fell nearly -4.10%. The tech-heavy index created an extremely long-red candle moving down to break below the long-term uptrend line and moving average. The move is supported by the indicators which are bearish and moving lower. My target for support is near the 10,400 level and lows set earlier this year, and coincidentally, another major uptrend line.

The Dow Jones Transportation Average posted the second largest decline at -4.0%. The transports created an extremely long red candle moving down to break below the long-term EMA and uptrend line. The index is indicated lower and may move down to the 10,400 level and support targets near the February lows and another key uptrend line.

The S&P 500 posted the third largest decline with a loss of -3.25%. The broad market index created a long red candle moving below the long-term moving average, and it is indicated lower. The move confirms resistance at the February all-time high and may take the index down to retest the March lows. However, there are targets near 2,700 which coincide with a pivot set in May and a key long-term uptrend line that are likely to halt prices if only for a time.

The Dow Jones Industrial Average posted the smallest decline with a loss of only -3.14%. The blue-chip index created a long red candle moving down to break a long-term uptrend line, but it is still well above its long-term moving average. The indicators are bearish so further price decline can be expected. My targets for possible support are near 25,500, 25,250 and 25,000 in the near-term and I would not be surprised to see all three of them hit. Longer-term the index remains in an uptrend.

There are lots of reason why the indices sold off today but only one that matters; earnings growth has reached its peak. Although earnings growth is going to be stellar this quarter and expected in double digits for the next five, that growth is slowing, and that means the big growth stocks that have dominated the market are falling out of favor. The selling may continue, but I don't think the indices will fall much further. Growth is still in the forecast, and it will lead to a buying opportunity for stocks if it isn't already here. This time when the signal to buy comes, look for the beaten down names, underappreciated sectors and steady dividend payers to shine. I remain firmly bullish for the long term but have turned cautious for the near-term, watching to see how the secular rotation out of growth names unfolds.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Capitulation

by Jim Brown

The A/D line was 7:1 in favor of decliners on volume of 10 billion shares. This was a major market event BUT there was still no fundamental reason. Markets take profits. It is a fact of life and we have to deal with the unexpected events. The carnage today was dramatic.

The top eight stocks in the list are typically the defensive stocks that are in favor when the market melts down. McDonalds was positive earlier in the day but was eventually dragged lower with the rest.

The market caught fire when the Russell crashed below the long-term support of the 200-day average at the open. The index could now be targeting 1,500 and that would be a major drag on the rest of the market. I warned that the Russell was the sentiment indicator for fund managers and apparently, they have turned bearish.

I am recommending we buy the opening dip because the likelihood of a repeat decline is very rare. Q3 earnings are just ahead and after today there are plenty of bargains.

I have written multiple times about second half lows being made in the first two weeks of October. However, October normally posts a gain for the month. I did not really expect the 2H lows to occur this year after a relatively tame Aug/Sep and strong fundamentals but the market has decided to follow the prior trend.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

Nuked

by Jim Brown

The Nasdaq suffered a direct hit with a monster 315 point loss to tank the entire market. There were no winners today. Even the defensive stocks succumbed to the carnage. This was an extremely rare occurrence with A/D 7:1 declining on 10 billion shares of volume.

The S&P futures were down -9.50 earlier then rebounded back to flat before rolling over again at -3. I recommended we add to all the positions using lower strikes and entry triggers at lower price points.

After watching the futures recover 10 points I went back and removed the entry triggers.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

AAPL - Apple Inc
The long position was stopped at $219.50.

If you are looking for a different type of option strategy, try these newsletters:

Apple crashed with the market back to support at $216 with a $10.51 drop to stop us out. I would not hesitate to buy this dip as soon as the market finds a floor. Shares fell another $2 in afterhours. I am going to recommend a new entry with a trigger. We may not be triggered or it may NOT be the bottom. Buyer beware.

Buy Dec $225 call, expected premium $6.50. No stop.

Original Trade Description: Oct 6th

Apple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers to consumers, and small and mid-sized businesses; and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. Company description from FinViz.com.

Support held and it is time to get long. We have been short Apple for the post announcement decline but support held and the Nasdaq looks like it wants to rally.

Apple earnings are Oct 30th and everyone will be looking for good news about the new iPhone products. Since support held, I a recommending we take a short term November position and try to catch the earnings run.

Morgan initiated coverage with an outperform rating and the second highest price target on the street at $272. That would be a 21% gain from Friday's close. The analyst believes the service business is growing faster than people expect and the average selling price will also be higher. He thinks Apple Music will contribute $30 billion in revenue by 2025 and Apple Pay will contribute $6 billion. The average price target is $232.13.

Premiums are high because expectations are high. I am using two different entry triggers and strike prices in order to not be forced into a spread. ONLY enter whichever trigger is hit first. Do NOT enter both.

We were not stopped because there was no stop loss. This is a December position and plenty of time for a recovery.

I am recommending we buy this dip to support.

Buy Dec $110 call, currently $3.86. No stop loss.

Original Trade Description: Sept 29th

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates through Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments. The Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises. The Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as providing training and certification to developers and IT professionals on Microsoft products. The More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

This is a no brainer recommendation. If the market is going to rise over the next two months, the Nasdaq is likely to be the leader. Microsoft has no skeletons in the earnings closet and hardly a day goes by without some new announcement.

Earnings are Oct 22nd and we will exit the day before.

Shares have been consolidating at the recent highs just under $115. A breakout in a positive market should hit $120 relatively easy. In theory we should wait and buy a dip to the 30-day but with a market rally potentially imminent we should take a chance now.

The Nasdaq 100 Index fell -327 points. That is massive and the big cap techs were the leaders. Our December position has lost more than 50% but we have two months to recover. I am recommending we buy this dip.

Buy Dec $177 call, currently $4.24. No stop loss.

Original Trade Description: Oct 6th.

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 IndexÂ®. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq declined -3.2% or -257 points last week. The Nasdaq Composite broke through the support of the 50-day but honored the 100-day when it came within 2 cents at the low for the day.

I believe investors will buy this dip just like they bought the multiple dips over the last six months. Tech stocks are the highest growth stocks and the least impacted by tariffs.

The S&P crashed through the 2,800 level to 2,785. The SPY is approaching the 200-day average at 276.23. I am recommending we buy this dip. There is very strong support at 270.

Buy Dec $285 call, currently $4.47, no stop loss.

Original Trade Description: Sept 26th

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world.

The SPY has pulled back to the 30-day average and actually a steeper decline than the S&P-500. The SPY is near support at the 30-day average.

I believe the market is going to move higher during the Q3 earnings cycle. Once we are out of this quarter after Friday's close, we could see the market begin to turn higher with just two weeks before the Q3 cycle begins.

This may seem counter intuitive with the market weak over the last several days but the fundamentals remain strong. We just need to get past the various headlines and out of the quarter. Thursday will be an especially bad headline day so expect some volatility.

Shares are simply reacting to the Nasdaq crash. I am recommending we average down on this position. The next two months are normally the strongest period for tech stocks with a 6% average gain and many times significantly into double digits. Buy a couple contracts and we can lower our cost and potentially make money with a lower breakeven.

Buy (2) Dec $50 Calls, currently 50 cents, no stop loss.

Original Trade Description: Sept 22nd

The Communication Services Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Communication Services Select Sector Index (the "Index"). The Index seeks to provide an effective representation of the communication services sector of the S&P 500 Index. Seeks to provide precise exposure to companies from the media, retailing, and software & services industries in the U.S. and allows investors to take strategic or tactical positions at a more targeted level than traditional style based investing. Description from State Street Global Advisors.

With FB, Alphabet, ATVI, NFLX, EA, TWTR, TTWO and TRIP all moving to the previously dormant XLC sector ETF, the odds are good that a lot of portfolio managers will shift investments to the ETF in order to be exposed to those stocks.

The downside to this theory is the 15 or so unwanted telephone, newspaper and TV stations in the same ETF. Fortunately, those stocks I listed above make up 59.5% of the ETF so they should control the direction. After seeing the big cap techs decline for no particular reason over the last two weeks it seems obvious now that they were victims of the S&P/MSCI index/ETF restructuring.

I am going to recommend an inexpensive November option because a rebound, if it is going to happen, should be relatively quickly.